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Non Tax Resident Withholding

Capital Gain vs Business Income?

On a sale of Canadian real estate, the first question to arise is whether any resulting gain is a capital gain or business income.

A residential property which is purchased for personal use, or for rental and held for long-term investment, will be capital property. On a sale, any gain will be a capital gain. However, a property which is purchased on speculation (an adventure in the nature of trade) will result in the gain on sale being treated as business income.

The important distinction is that business income is fully taxable, whereas only 50% of a capital gain is included in income.

Investment intention is often deduced from other factors such as the following:

  • Frequency of transactions
  • The length of time the property is owned
  • The use to which the property was put
  • Whether rental income was derived (showing production of income was a main purpose)
  • The factors that led to the sale

Individual vs Corporation

Graduated tax rates apply for individuals and vary based on the income level. The lowest tax rate for a non-resident is approximately 22%, while the highest rate, reached at taxable income over $200,000 (roughly), will be about 49%. The effective tax rate on a capital gain is half of these rates.

Ownership of Canadian real estate by foreign persons through a foreign corporation can result in a significant tax advantage because such a corporation will pay a 25% corporate tax rate. Thus, on a capital gain, the effective tax rate will be 12.5%.

If the real estate is not capital property, the gain will be fully taxable. If a foreign corporation is used, then branch tax at 35% (or the lesser treaty rate if applicable) will also be charged.

For a Canadian-resident individual, the gain on sale of a principal residence is tax free.

Clearance Certificate Procedure

Step 1: Purchaser is required to withhold 25% (or 50% in some cases1) of the total purchase price. Typically, this is held in trust by the seller’s lawyer.

Step 2: Seller must let the CRA know about the sale or proposed sale by filing for a Certificate of Compliance, completing the applicable form (T2062 or T2062A). These are due no later than 10 days after the actual sale. The penalty for late filing is $25 per day to a maximum of $2,500, even if no taxes are owing.

Step 3: The CRA will request payment or acceptable security to cover the resulting taxes payable and issue a Certificate of Compliance.

Step 4: Upon receipt of a copy of the Certificate of Compliance, the seller's lawyer can release the amounts withheld from Step 1 to the non-resident Seller.

Step 5: After the end of the calendar year, the non-resident Seller is required to file a Canadian tax return to report the sale.

Case Example

Miss Tang sold a property for $490,000 and originally paid $455,000 ten years ago.

  • Tang's lawyer gave undertaking and withheld 50%2 of sale price:

    "to holdback 50% of the Purchase Price proceeds as the CRA Withholding Funds.

    i. The CRA Withholding Funds shall be held by our office in trust until we receive advice from the Canada Revenue Agency (the "CRA'') of the amount, if any, that is required to be remitted to the CRA in exchange for a Clearance Certificate, pursuant to Section 116 of the Income Tax Act of Canada in relation to the Seller's disposition of its interest in the Property (a "Clearance Certificate); and

    ii. Upon receiving advice from the CRA of the amount required for the issuance of a Clearance Certificate, if any, we will tender such amount to the CRA and upon receipt of the Clearance Certificate, we will provide the Purchaser's copy of the Clearance Certificate, as issued by the CRA, to your office, and thereafter we will be at liberty to release the remainder of the CRA Withholding Funds, if any, to the Seller. If the amount required to be remitted to the CRA is in excess of the amount of the CRA Withholding Funds, then we will tender the full amount of the CRA Withholding Funds to the CRA in satisfaction of the Buyer's withholding tax liability pursuant to the Income Tax Act of Canada in respect of the purchase of the Property and provide you with a copy of our remittance letter and cheque in full satisfaction of our undertaking."

  • Tang's accountant filed for clearance certificate, and got a payment notice from CRA. In this notice, CRA is asking for a payment of $8,750 as security:
\[(499,000-455,000)\times 25\% = 8,750\]
  • Tang's lawyer sent the cheque to CRA and about one month later, CRA issued this clearance certificate. Lawyer release the balance of withholding amount to Miss Tang.
  • Tang is required to file T1 for income tax of 2023. If she has no other income from Canada, her composite tax rate would be 25% (Federal 15% + Alberta 10%) of the half of capital gain, in another word, her final tax would be $4,375:
\[(490,000 - 455,000) \times 50\% \times 25\% = 4,375\]

which means, she will get a refund of the same amount from CRA.

  1. TAXATION OF CANADIAN REAL ESTATE: WHAT NON-RESIDENTS NEED TO KNOW
  2. Non-Residents Selling Property in Canada

  1. Where a non-resident sells Canadian real estate, the purchaser is required to withhold 25% of the gross purchase price and remit this to C.R.A. as a withholding tax. If the property is:

    (i) land inventory,

    (ii) real estate which is not capital property, or

    (iii) the building component that is used in a rental activity,

    the withholding tax rate is 50% of gross proceeds. ↩

  2. withholding 50% is because her lawyer is not certain if the property is for rental or not at that time. ↩